HealthEquity blog

5 things you should know about HSAs and the new tax law

Last month, the United States Congress passed legislation that significantly overhauls the nation’s tax laws, including (among other things) lowering corporate tax rates, increasing the standard deduction, capping the mortgage interest deduction and eliminating many other deductions.

The law also included some provisions that affect the healthcare industry, including some minor parts of the law related to health savings accounts (HSAs). Here are a few things to note:

1. HSAs still offer triple-tax advantages

The new law did not directly affect HSAs, meaning they are still one of the most tax-advantaged programs available to eligible taxpayers. Accountholders can still contribute to their HSA, earn interest and dividends, and distribute their funds tax-free.1 There is bi-partisan support of HSAs by many politicians, and talk of future legislation to expand HSAs continues.

2. Qualified medical expenses will be defined by a different code

This is currently more of an IRS administrative change and, at least in the short-term, won’t have an impact on individual accountholders. Essentially, the new rule now allows for the U.S. Treasury to define what a qualified medical expense is instead of the IRS. There is no indication that the Treasury will make any changes, though they may in the future add to or (less likely) delete from the list. Currently, qualified medical expenses remain the same, and accountholders will still need to ensure that they are spending HSA funds correctly.

3. The medical expense deduction threshold has been reduced

In the past, people could deduct qualified medical expenses in excess 10 percent of their adjusted gross income (unless they were paid from a tax-advantaged account like an HSA). While the new tax law keeps the medical expense deduction, it also lowers the threshold to 7.5 percent for 2017 and 2018. HSAs and other tax advantaged accounts can still be used instead.

4. The law abolishes the “individual mandate” of the Affordable Care Act

The “individual mandate” of the Affordable Care Act required individuals to obtain a minimum level of health insurance — either through their employer or through one of the insurance exchanges — or face a fine. However, the new tax law eliminates the penalty after 2018.

5. Archer MSAs have not been eliminated

These types of medical savings accounts (named after the Congressman who sponsored the amendment to create the MSA) allow accountholders to earn tax-deductible interest for medical expenses. Investopedia notes that Archer MSAs are often used by small business or self-employed individuals as a way to pay for healthcare services to employees. While the House version of the new tax law would have eliminated the Archer MSA, the Senate version ended up keeping it intact. The law still allows for people to roll Archer MSA funds tax-free into an HSA.

Conclusion

The new tax law, together with other rules and regulations, allows HSAs to remain one of the most beneficial ways for people to not only save for medical expenses, but also to prepare for retirement. Learn more about the benefits of HSAs at http://www.healthequity.com/hsalearn.

1.HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state’s specific rules.